Tuesday, 26 January 2010

Alternative energy: overestimated but still underperforming

I’m writing this blog because of a high profile article on ‘seekingalpha’ linked to below.

Is the Time Right to Buy the Solar Sector?

Back in 2007 and early 2008 skyrocketing oil prices made clean alternative energy producers and equipment manufacturers a hot investing item. Valuations have been factoring in not only high future growth, but also significant margin improvements.

All this turned sour during the October 2008 financial crisis. With the oil price taking a major hit, alternative energy producers were finding it more and more difficult to finance their investment projects, their estimated project pay-back time increased dramatically and some project cancellations and rescheduling was unavoidable.

Producing investment goods is a rather cyclical business and even more so when the major investment drive: ‘energy cost reduction’ finds itself partly offset by temporarily low fossil fuel prices.

As a result alternative energy producers and equipment manufacturers took a major blow in the general market sell-off.

Last few months we have witnessed a nascent economic recovery, not in the least because of massive government deficit spending. Especially in Germany, the incentives for individual households to invest in solar photovoltaic panels were quite rewarding. Similar initiatives have been set up throughout Europe on a generally more modest scale.

Yet of a different order of magnitude is the following project under investigation:

Energy from the desert: the DESERTEC solar project
The objective of this initiative is to analyse and develop the technical, economic, political, social and ecological framework for carbon-free power generation in the deserts of North Africa. The key aim is to produce sufficient power to meet around 15% of Europe’s electricity requirements and a substantial portion of the power needs of the producer countries. Deutsche Bank would agree to finance this public-private partnership. More information on:

A project of this scale is a giant challenge for the participating equipment manufacturers. Not only it provides an unprecedented turnover perspective, but it is the major drive for the technological breakthroughs which ultimately lead to a much lowered investment cost per unit of installed power and hence to a major competitive advantage.

All of this government support did not impress investors, as there has been a rather tepid interest for the alternative energy sector.

Overestimated but still underperforming
As the general stock market made a giant upward leap since the March 2009 lows, alternative energy equipment producers are definite laggards. While profiting from the initial leg up from March to June 2009, the sector has been facing strong headwinds ever since.
There are a few ETF’s targeting the alternative energy niche. Some of them are more specificly aimed at solar or wind energy. There even are a few investment vehicles focussing on (hardly alternative) nuclear energy.
Especially the recent correction hit the alternative energy sector and the ETF’s trading the sector particularly hard. Year-to-date returns are all negative. What makes it worse is the current valuation below the 200 day moving average. The exceptions on this last observation are the few ETF’s covering nuclear energy!
(click to enlarge)

Valuations have come down. Yet most (photovoltaic) solar power equipment manufacturers are currently still trading at hefty multiples (that means those that are profitable).

A nice breeze
The situation is better for wind turbine producers such as Vestas or Gamesa. While profiting less from direct government aid to prop up customer demand and growth, the economic metrics for investing in sustainable wind energy have improved over the years. Off shore wind parks or wind farms in sparsely populated coastal regions in Northern Europe, Canada or (why not) Argentina find total investment cost reduced by scaled up wind turbines, tailored to the average range of wind speeds of the region. A more extended network of wind turbines reduces the need for back up power (usually natural gas turbines that are cheap to install, come on line in a matter of minutes but are fairly expensive to operate).

Whereas power generation by wind energy still requires higher investment costs than a coal fired power plant, a nuclear plant by its massive scale (in order for it to be competitive) is more expensive and imposes more constraints on the electricity network by the mere concentration of the power output. Wind parks are licenced and built, nuclear power stations require government guarantees and financing support to get built!

Let's look at some fundamental analysis for Gamesa over the economic cycle 2001-2008.

(2009 data are to be published after the general assembly in April)

A a current share price of about €11, the PE is below 9. Even when factoring in a possibly lower future growth than over the past decade, you hardly call Gamesa an expensive stock. As most wind generator manufacturers, Gamesa is trading below its 200 day MA. Technical analysts will still observe some downward momentum, but an oversold RSI.


  1. Solar ETFs Off To A Not-So-Bright Start

    by Michael Johnston on January 27, 2010
    ETFs Mentioned: GEX * ICLN * KWT * PBD * PBW * PUW * TAN

    After surging out of the gates to start the new year, many ETFs have sharply reversed course, now finding themselves in the red for 2010 as January draws to a close. The S&P 500 SPDR (SPY), which was up nearly 3% after the first six trading sessions, is now down almost 2%. The shift in fortunes for more risky assets has been even more severe: the iShares Emerging Markets Index Fund (EEM) has already slipped 9.5% from its 2010 high. But no sector has been hit harder than solar energy, as the risks of relying on government support during tenuous economic times have come to light in recent weeks.


    Solar ETF Options
    Following the downward correction, many investors now view the solar energy industry as potentially a bargain buy. An investment in a single solar energy stock can be exceedingly risky, making ETFs focusing on this sector an appealing play. Fortunately for investors bullish on the long-term prospects for alternative energy, there are a handful of funds offering exposure, including:

    * PowerShares WilderHill Clean Energy Portfolio (PBW)
    * Market Vectors Global Alternative Energy ETF (GEX)
    * PowerShares Global Clean Energy (PBD)
    * iShares S&P Global Clean Energy Index Fund (ICLN)
    * PowerShares WilderHill Progressive Energy Portfolio (PUW)

    There are also two ETFs focusing more specifically on solar power.
    * Claymore/MAC Global Solar Energy (TAN)
    * Market Vectors Solar Energy ETF (KWT)

    Complete article:


  2. Wind Power Grows 39% for the Year

    Again not an entirely positve outlook: the 39 % increase mainly concerns the realisation of contracts of the first half of 2008 or before. Wind generator manufacturers are drawing down on inventory while supplying equipment and production stays low. Last week, Hansen Transmissions (HSN), the main gearing box supplier for wind generator manufacturers, saw its turnover reduced and prognoses were revised downwards.
    Again this was not without consequences for Vestas and Gamesa which (as largest European manufacturers) are experiencing a major slide. Forecasting the bottom is difficult. The installed wind power capacity remains far below market saturation (apart from Denmark which has been investing in wind power for a few decades). Yet customers need a profitable outlook to find financing for their projects.
    Regulatory minimum quota for renewable/green power generation are a sound offset for future growth in the sector.
    A new press release of Hansen Transmissions was slightly more uppish, expecting growth in the second half of 2010, after a lacklustre first half of the bookkeeping year 2009/2010 with turnover dwindling by 12%, though margins improved. (http://www.tijd.be/nieuws/ondernemingen_technologie/Hansen-_-Nog_twee_moeilijke_kwartalen-.8289494-436.art)